Week in Review

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Week in Review

09/13/2014

For the week 9/8-9/12

Edition 805

Washington and Wall Street

“You ask what is our policy. I will say, it is to wage war with all our might, with all the strength that God can give us, to wage war against a monstrous tyranny never surpassed in the dark, lamentable catalogue of human crime.

“You ask what is our aim? I can answer in one word: Victory at all costs. Victory in spite of all terror. Victory however long and hard the road may be. For without victory there is no survival.”

“I want the American people to understand how this effort will be different from the wars in Iraq and Afghanistan. It will not involve American combat troops fighting on foreign soil....This strategy of taking out terrorists who threaten us, while supporting partners on the front lines, is one that we have successfully pursued in Yemen and Somalia for years.”

--President Barack Obama, on taking the fight to ISIS in both Iraq and Syria, Sept. 10, 2014

Not quite Churchillian, nor accurate when it comes to the examples of Yemen and Somalia.

Thankfully there is little economic news in the U.S. to report on this week so the opening is devoted to our new war, which Secretary of State John Kerry and National Security Advisor Susan Rice initially insisted on calling “a sustained counterterrorism campaign.”

From CNN/ORC International:

7 in 10 believe ISIS has the resources to launch an attack against the United States.

76% favor additional airstrikes against ISIS, but by a 61-38 margin oppose boots on the ground.

45% see ISIS as a “very serious threat to the U.S.” 49% thought the same of al-Qaeda 11 years ago.

From a Washington Post/ABC News poll:

Over half see Obama’s presidency as a failure, 43% say he is a strong leader.

Only 38% approve of Obama’s handling of foreign policy.

71% support air strikes in Iraq; 45% was the support level in June.

From a Wall Street Journal/NBC News survey:

Those approving Obama’s handling of foreign policy is at a new low, 32%.

61% want action against ISIS; 13% say it is not in our national interest.

40% want just airstrikes; 34% are willing to commit U.S. ground troops.

A year ago, only 21% wanted action against Syrian President Assad and his use of chemical weapons.

47% believe the country is less safe than before 9/11. The figure was just 28% one year ago.

So you look at all the above and, yes, attitudes across the country have changed rapidly, no doubt influenced by the videos of the beheadings of two American journalists. 

Meanwhile, President Obama’s poll numbers, especially on the foreign policy and leadership fronts, continue to plummet, but with resolute action in the coming weeks and months he could turn this around somewhat. Whether it would be enough to influence the midterm elections is up to him. The American people are crying for leadership, and they don’t even fully understand the potential dangers in Putin’s Russia and the troubling signals emanating from China the past few months in particular.

As Patrick J. McDonnell of the Los Angeles Times notes, President Obama’s strategy is dependent on three basic assumptions, “all of them highly questionable.”

In his speech, “Obama envisioned the emergence of a newly unified Iraqi government, an effective Iraqi fighting force and a reenergized, U.S.-backed ‘moderate’ rebel front in Syria. Along with U.S. training and airstrikes, and help from international allies, those three factors would spell defeat for Islamic State militants who have made deep inroads in both Syria and Iraq.

“All three goals seem long shots in a region where U.S. aims have often foundered amid harsh and intractable realities.”

First off, I got a kick out of Secretary of State Kerry saying this week that the agreement on an Iraqi unity government was a huge success. For starters, he failed to mention that Iraqi leaders, going back to Nouri al-Maliki’s last few years, hadn’t agreed on individuals to lead the Interior and Defense Ministries, which are, I think you’d agree, two rather important posts.

It’s also a fact the new prime minister, Haider Abadi, is really just a clone of Maliki’s and he has little chance of gaining broad Sunni support, especially with the majority Shiites demanding revenge for Sunni atrocities, while to many Sunnis, the Shia militias Maliki so relied on and supported present a far bigger threat than ISIS.

As for transforming the Iraqi army (again), McDonnell notes “this is a stretch.”

The early key is can the Iraqi army and Kurdish Peshmerga, along with U.S. support, take back Iraq’s second-largest city of Mosul?

Then you look at Syria and wonder where optimism is warranted in terms of the “moderate rebels.” Saudi Arabia has stepped forward and offered its facilities for training, but think about how long this would take, and just who will participate. And how do you vet the disparate groups in Syria? We once knew, as Senator John McCain has rightfully claimed, who the moderates were. We don’t today (which is where I differ with McCain).

Dalia Dassa Kaye, a Rand Corp. analyst, said in a conference call on Thursday with the likes of the L.A. Times’ McDonnell, “In Syria, the partners on the ground are the most worrisome element of the strategy. What’s not clear is what is different from even several months ago, when the president outlined and articulated his concerns about arming the opposition groups in Syria.”

The White House at week’s end was looking to secure military and financial backing from allies in the Middle East and Europe, and while ten Arab states told Sec. Kerry in Saudi Arabia they would join the U.S. in a strategy to defeat ISIS, what they actually offer is far from known at this point, while in Europe, France, the U.K. and Germany had earlier offered their support, but there have been contradictory statements since, with Britain seemingly not wanting to be part of any military action in Syria.

France said it may participate in air strikes, as well as arm Kurdish fighters, which it has started to do, but Germany has only talked about surveillance flights and some equipment.

“One of the Democrats’ campaign slogans is ‘Bin Laden is dead and GM is alive.’ It needs to be pointed out that at least 20,000 of the Syrian deaths [Ed. at this time an estimated 23,000 to 26,000 had been killed in the civil war] could have been prevented if the White House had taken coordinated humanitarian action with Turkey early on. Not a military invasion but just the establishment of safe havens and the Obama administration could have significantly reduced the human toll.

“But it’s too late now. We missed our opportunity. The situation is indeed far more dangerous.

“It was the same situation in 2009 when President Obama missed an opportunity in Iran to support the Greens, but instead when the United States just sat back, the mullahs crushed the uprising and now look where we are there.

“It’s pathetic. It’s what infuriates me about how the president is getting a pass on his foreign policy....

“In Ankara, Turkish Prime Minister Erdogan accused the outside world of indifference on Syria, adding, ‘The regime in Syria has now become a terrorist state.’”

As I wrote often in those days, we blew our chance with Erdogan and now we don’t know where the guy stands. He was crying for help, a NATO ally, but it was about election politics in 2012, of course. It is absolutely sickening. As I’ll point out next week, numerous times, well before last year’s “red line” everyone uses now as a benchmark, I said we would reap the whirlwind. We have.

The CIA now estimates the number of ISIS fighters to be two to three times more than previously thought; between “20,000 and 31,500 fighters across Iraq and Syria.”

Senator John McCain, to new CNN analyst Jay Carney, former White House spokesman, regarding the Free Syrian Army:

“Facts are stubborn things, Mr. Carney, and that is, the entire national-security team, including the secretary of state [Ed. then Hillary Clinton], said we want to arm and train and equip these people and [President Obama] made the unilateral decision to turn them down. And the fact that they didn’t leave a residual force in Iraq, overruling all of his military advisers, is the reason why we’re facing ISIS today. So the facts are stubborn things in history, and people ought to know them. And now the president is saying, basically, that we are going to take certain actions, which I would favor, but to say that America is safer, and that the situation is very much like Yemen and Somalia shows me that the President really doesn’t have a grasp for how serious the threat of ISIS is.” [Wall Street Journal]

“In his Islamic State speech, President Obama said many of the right things. Most importantly, he finally got the mission right: degrade and destroy the enemy.

“This alone will probably get him a bump in the polls, which have dropped to historic lows. But his strategic problem remains: the disconnect between (proclaimed) ends and means.

“He’s sending an additional 475 American advisers to Iraq. He says he’s broadening the air campaign, but that is merely an admission that the current campaign was always about more than just protecting U.S. personnel in Irbil and saving Yazidis on mountaintops. It was crucially about providing air support for the local infantry, Kurdish and Iraq.

“The speech’s only news was the promise to expand the air campaign into Syria and (finally) seriously arm the secular opposition. But this creates a major problem for Obama. Just a month ago, he ridiculed the non-jihadist rebels as nothing but a bunch of ‘doctors, farmers, pharmacists and so forth.’ Now he deputizes them as our Syrian shock troops. So he seems finally to have found his Syria strategy: F-16s flying air support for pharmacists in tanks.

“Not to worry, says the president. We’ll have lots of other help – ‘a broad coalition to roll back this terrorist threat.’ He then proceeded to name not a single member of this stout assembly or offer even an approximate number.”

Then there is the issue of the president comparing the new campaign to our successes in Yemen and Somalia, which was truly laughable.

“Is he serious? First, there’s no comparing the scale. This year has seen 16 airstrikes in Yemen, two in Somalia. Two! That doesn’t even count as a pinprick....

“(And) Yemen and Somalia are failed states – unsafe, unstable, bristling with active untamed insurgencies. We occasionally pick off a leader by drone – an absurdly inadequate strategy if the goal is to ‘degrade and ultimately destroy’ the Islamic State, which the administration itself calls a terror threat unlike any we’ve ever seen.”

By the way, days after we took out the al-Shabaab leader in Somalia the other week, al-Shabaab killed 20 African Union peacekeepers in a car bomb.

“Let us note briefly the commanding irony of Barack Obama delivering – hours before 9/11 – the anti-terrorism speech that history required of his predecessor after September 11, 2001. There is one thing to say: If we are lucky, President Obama will hand off to his successor a terrorist enemy as diminished as the one George Bush, David Petraeus and many others left him.

“In the days before Mr. Obama’s ISIS address to the nation, news accounts catalogued his now-embarrassing statements about terrorism’s decline on his watch – the terrorists are JV teams, the tide of war is receding and all that.

“Set aside that Mr. Obama outputted this viewpoint even as Nigeria’s homicidal Boko Haram kidnapped 275 schoolgirls, an act that appalled and galvanized the world into ‘Bring Back Our Girls.’ No matter. Boko Haram slaughtered on, unabated.

“Some of these gaffes came in offhand comments, but others were embedded in formal speeches from the presidential pen, such as the definitive Obama statement on terrorism last May at the National Defense University: ‘So that’s the current threat – lethal yet less-capable al-Qaeda affiliates.’ A year later, ISIS seized one-third of Iraq inside a week.

“Worse than misstatements have been the misdecisions on policy: the erased red line in Syria, the unattainable reset with Vladimir Putin’s brainwashed Russia, the nuclear deal with the ruling shadows in Iran. The first two bad calls have pitched significant regions of the world into crises of virtually unmanageable complexity....

“It has taken 13 years to this day, September 11, for the reality of global Islamic terrorism to finally sink in – here in the U.S. and everywhere else, including the ever-equivocal capitals of the Middle East.

“In the years after 9/11 came London, Madrid, the Boston Marathon, multiple failed attempts to bomb New York City, Mumbai, Kenya, Boko Haram, the re-rocketing of Tel Aviv, Christian holy places destroyed, thousands of Arabs blown up in the act of daily life. That’s the short list. ISIS is just the tip of the world’s unstable iceberg. We’re all living on the Titanic.

“Now a reluctant progressive president goes to war without admitting it is war.”

[Friday, the White House, State Dept. and Defense Dept. all suddenly said, yes, we were waging a “war.”]

“It is reasonable to question the level of Obama’s enthusiasm for a series of options he has previously ignored, dismissed or even mocked.... Tim Arango, the New York Times Baghdad bureau chief, recently observed: ‘After 2011, the administration basically ignored [Iraq]. And when officials spoke about what was happening there, they were often ignorant of the reality.’ This was the period in which al-Qaeda in Iraq – then seriously degraded – began to recover, gained a foothold in Syria, changed its name, attracted jihadist recruits, gained battlefield experience and resumed the offensive.

“So Obama’s policy shift is late. For this reason, it has a reduced chance of success. It has, so far, attracted a distressingly small coalition of the willing. But the essence of the policy is reasonable.”

Where the president can be successful, as Gerson writes, is in keeping “terrorist leaders harried, moving and fearful for their lives – unable to do their day jobs, which includes planning spectacular acts of murder. Territorial havens magnify the terrorist threat.

“The United States has successfully implemented this type of strategy before....

“(But) it is one thing to have a strategy; another to pursue it with creativity and absolute resolve. And there is basis for skepticism in Obama’s hedged and careful war.”

“The term ‘nation-building’ understandably is out of favor: It has a hubristic quality that rings especially false to Americans who have watched their countrymen die in Afghanistan and Iraq for so many years. America cannot ‘build’ Iraq; Iraqis must do that. But Americans, if they want to beat back the Islamic State, must also be committed to helping Iraqis build Iraq....

“ ‘We cannot do for Iraqis what they must do for themselves,’ Mr. Obama said, and that is as true of institution-building as it is of killing terrorists. But U.S. assistance is necessary for both endeavors, for two reasons. If Mr. Obama tells the locals that he is dispatching U.S. troops only to kill those who might someday threaten the United States, those troops are unlikely to win anything but grudging or mercenary cooperation from their local partners.”

“Today, the non-Islamists want to know that the United States supports them. For America, that means not partnering with Iran against ISIS, though both countries may avoid interfering with each other’s operations against the insurgents in Iraq.

“It means actively competing with Iran in the rest of the region, independently of whether an acceptable nuclear deal can be reached with Tehran. It means recognizing that Egypt is an essential part of the anti-Islamist coalition, and that American military aid should not be withheld because of differences over Egypt’s domestic behavior.

“America should also coordinate with Egypt and the U.A.E. when they bomb Islamist targets in Libya, or elsewhere. Coordination will make their military operation more effective, as well as provide America with greater ability to influence their actions....

“The Obama administration worries about the consequences of excluding all Islamists. It worries, too, about appearing to give a blank check to authoritarian regimes, when it believes there need to be limits and that these regimes are likely to prove unstable over time. But as Egypt and the U.A.E. showed with the airstrikes on Islamists in Libya, some of America’s traditional partners are ready to act without us, convinced that the administration does not see all Islamists as a threat – and that America sees its interests as different from theirs. That is a problem.

“These non-Islamists are America’s natural partners in the region. They favor stability, the free flow of oil and gas, and they oppose terrorism. The forces that threaten us also threaten them. The Obama administration needs to follow three principles in these partnerships.

“Second, do not reach out to Islamists; their creed is not compatible with pluralism or democracy.....

“Third, America’s support for non-Islamist partners does not require surrendering our voice or supporting every domestic policy....

“No strategy is free of risk, but joining with our natural partners offers the best way forward.”

“It is hard to overstate the threat that (ISIS) poses. I call it al Qaeda Version 6.0. The Islamic State is far better organized, equipped and funded than the original. They are more experienced and more numerous. Several thousand carry Western passports, including American ones. All the terrorists have to do is get on a plane and head west. But perhaps the most important asset they possess is territory. For the first time since 9/11, a determined and capable enemy has the space and security to plan complex, longer-range operations. If we don’t think we are on that list, we are deluding ourselves.”

Meanwhile, Ali Haidar, Syria’s minister of national reconciliation affairs, told reporters in Damascus on Thursday, “Any action of any type without the approval of Syrian government is an aggression against Syria. There must be cooperation with Syria and coordination with Syria and there must be a Syrian approval of any action, whether it is military or not.”

Of course Syria would love the U.S. to take out ISIS. No need to ask.

Russia, a Damascus ally, said airstrikes against ISIS in Syria without a U.N. Security Council mandate would be an act of aggression, “a gross violation of international law,” said a Russian foreign ministry spokesman. [Daily Star]

The Russian statement is laughable given the situation in Ukraine.

Just a few words on the U.S. economy. In two weeks, the yield on the 10-year Treasury has risen from 2.34% to 2.61%, a rather sizable increase. The only major economic data point for the week, August retail sales, came in at a healthy up 0.6%, up 0.3% ex-autos, both as expected, but the prior month was revised upwards, so this added to the feeling that the economy is doing just fine. A report on consumer credit also showed borrowing in July rose by the largest amount in 13 years, yet another positive sign.

There are two keys this coming week. There’s a two-day Fed meeting and one of the reasons why the bond market has been taking a bit of a dive is the growing feeling Chair Yellen and her band of merry men and women will finally change the language on their accompanying statement to strongly hint at the first rate hike coming sooner than now forecast, the third quarter of 2015. Quantitative easing is also ending in October and, while well-telegraphed, could yet prove a mini-shock to the bond pits, especially if economic data remains solid.

Declining oil prices represent a tax cut for consumers so that’s helping matters in terms of spending, which in turn also isn’t good for bonds.

The other big event next week is the referendum on independence for Scotland which I’ll delve into shortly.

Finally, I’ve been talking about how the markets are ignoring the fact our defense spending must rise, and potentially in a big way vs. projections, and the sequester, which would have an obvious impact on both the deficit and in all likelihood interest rates. [It certainly wouldn’t hurt economic growth, another factor in forcing the Fed’s hand.]

“You might have thought that the lesson would be obvious. In the past year, we’ve had an elementary tutorial in the uses of raw military power: in Ukraine, where Russia manufactured a ‘rebellion’; in Iraq, where the Islamic State expanded its footprint; and in Asia, where China harassed ships of nations claiming islands China considers its own. But the implications of these events seem to have escaped the Obama White House and Congress.

“They are systematically reducing U.S. military power as if none of this had happened. Defense spending has become just another line item in the budget, increasingly disconnected from our strategic interests and potential threats. It’s a money pot of possible reductions to pay for burgeoning retirement benefits, mainly Social Security and Medicare, which are largely immune to cuts.

“Our strategic needs are twisted to fit available defense dollars, as opposed to defining realistic military missions and then estimating their costs....

“Since 2010, inflation-adjusted defense spending has declined 21 percent. This includes spending in Iraq and Afghanistan, called ‘OCO’ for overseas contingency operations. Without OCO, the drop is 12 percent.

“Defense spending in 2014 – including OCO – is 3.4 percent of the economy against a post-World War II average of 5.5 percent. If the (Budget Control Act of 2011) spending caps remain, defense spending in 2019 will fall below 2.5 percent of GDP, the lowest since 1940. [Ed. not a good benchmark, given what happened in 1939 and 1941.]....

“Already, the Army is being cut from an Iraq-Afghanistan peak of 566,000 to about 450,000. Under today’s caps, that might have to drop to 420,000....

“Since World War II, U.S. global leadership has rested in part on military might. It has often provided the stability that gave political and economic policies the time to succeed.... But the benefits of U.S. defense spending are often underappreciated because they flowed silently from wars not fought and global order maintained.

“Higher defense spending is in our interest because global order is in our interest. Global order is hardly guaranteed, but without a strong U.S. military, the odds of global disorder are much greater. This fundamental national interest is being subordinated to short-term political interests – Republicans who won’t acknowledge that higher taxes are needed to pay for an adequate military; Democrats who will cut almost anything except retirement spending. History is likely to judge them harshly.”

Or as Robert Kagan wrote in a Wall Street Journal op-ed:

“It is as if, once again, Americans believe their disillusionment with the use of force somehow means that force is no longer a factor in international affairs.

“In the 1930s, this illusion was dispelled by Germany and Japan, whose leaders and publics very much believed in the utility of military power. Today, as the U.S. seems to seek its escape from power, others are stepping forward, as if on cue, to demonstrate just how effective raw power really can be.

“Once again, they are people who never accepted the liberal world’s definition of progress and modernity and who don’t share its hierarchy of values. They are not driven primarily by economic considerations. They have never put their faith in the power of soft power, never believed that world opinion (no matter how outraged) could prevent successful conquest by a determined military....

“As we head deeper into our version of the 1930s, we may be quite shocked, just as our forebears were, at how quickly things fall apart.”

Europe and Asia

So regarding the Scottish independence vote, the European markets, and British pound, were rocked a bit, especially the latter, when it was revealed on Sunday that a YouGov poll put the Yes vote at 51% for the first time. This caused a panic in the British government of David Cameron, as among the many results of a Yes vote come Sept. 18, Cameron’s government would be sunk, according to many, as he would go down as the prime minister who lost the union. But it’s not just Cameron and the Conservatives who would lose. The opposition Labour Party has 40% of the seats in the House of Commons, but without Scotland, it would be 34%. In the event of a Yes vote, the 2015 election would take place with Scotland still in the U.K., while negotiating an exit. So as Robert Hutton of Bloomberg notes: Should Labour leader Ed Miliband then win a majority of the seats, including the Scottish ones, “his ability to govern would be in question.”

Yup, it’s a potential fiasco on so many levels, including the nuclear weapons issue I brought up last week. A Yes vote would bring to an end a 307-year-old union, so British leaders were scrambling to remind the Scots how much they had achieved together and what the consequences of a divorce would be. Various businesses said they would exit Scotland, including Royal Bank of Scotland. Japan’s biggest bank, Nomura, advised clients to slash financial exposure to the U.K. and brace for a possible collapse of the pound, warning separation would be a “cataclysmic shock.”

But a new YouGov poll on Friday showed the No vote at 52%, Yes 48%, but doesn’t include 6% who are undecided. A Guardian poll had it 51-49 No, but here it didn’t include 17% who weren’t clear which way they would go. Yet another poll for the Daily Record had the No vote ahead, 53-47. Alex Salmond, Scotland’s first minister, said the No campaign was “in complete and utter disarray.” Bottom line, it’s too close to call.  

What seems clear, though, is that even if the referendum is defeated, the Yes vote will be at least 40%, thus keeping the issue on the table (see Canada and Quebec), and that’s not good. Plus there are fears in Brussels that Britain would exit the European Union if the vote doesn’t go its way. [Actually, that would be a virtual lock given the current politics in the U.K.]

Prime Minister Cameron wrote in an op-ed for the Daily Mail: “The United Kingdom is a precious and special country. That is what is at stake. So let no one in Scotland be in any doubt; we desperately want you to stay; we do not want this family of nations to be ripped apart.

“As the people of Scotland put pen to ballot paper next week, you will be writing the U.K.’s future in indelible ink. It’s a momentous decision: there will be no going back.”

And as I stressed last week, regardless of whether the Scots vote to go their own way or not, the stage has been set for Catalonia to attempt to break away from Spain. An estimated 450,000 will rally on Thursday in Barcelona as the Scots hold their vote. The odds of Catalonia exiting would appear to be a given in the current atmosphere, with the latest polls showing 55% of Catalans supporting independence. But Madrid has not granted the Catalans, as is the case in Scotland, a legally binding referendum. Catalonia’s president, Artur Mas, nonetheless is seeking to hold one Nov. 9.

“The United Kingdom ranks as one of the most successful marriages in history. England, Scotland, Wales and Northern Ireland have survived ancient hatreds, tribal rivalry and war. Each nation has been enriched by a journey of enlightenment, empire, shared energy and enterprise....

“Scotland is a proud and vibrant nation. Scots have contributed disproportionately to the union. They have played a leading role in arts, commerce, literature, the military, politics and sport. But a vote in favor of secession would be an irreversible act with profound consequences, not merely for 5m Scots but also for the other 58m citizens of England, Wales and Northern Ireland.

“The act of separation would diminish the U.K. in every international body, notably the EU. It would raise complex – and still unanswered – questions about the common defense of the British Isles, the future of the currency and political arrangements for the rest of the U.K. Above all, a Yes vote would ignore the lessons of the 20th century, a chapter in European history indelibly scarred by narrow nationalism....

“Everything turns on the vote on September 18. It is not too late to remind the Scots and the rest of the U.K. how much they have benefited from being British. Great Britain stands for an expansive and inclusive view of the world. The union is something precious, not a bauble to be cast aside. In a week’s time, the Scots can vote with a sense of ambition to build on those successes. Rather than retreat into tribalism, they can continue to be part of a nation rooted not just in history and culture but a common destiny which over three centuries has served all so well.”

Meanwhile, European Central Bank President Mario Draghi urged governments to match the ECB’s effort to stimulate the eurozone’s economy with investments and reforms of their own.

But in the battle between Germany and much of the rest of the eurozone, German Finance Minister Wolfgang Schauble said Europe would “surrender to the world of illusion” by believing the use of more public money and higher deficits would achieve sustainable growth and permanent jobs, as reported by the Wall Street Journal.

“Calls in Europe to use more and more public money while accepting higher and higher deficits and debt is leading us astray,” Schauble said in a speech to Germany’s parliament.

“Growth and jobs aren’t a result of higher deficits, because we shouldn’t have any problems if that was the case... The only way out is innovation, structural reforms, investment, reliable conditions and trust in the sustainability” of public finance.

Frances’ finance minister, Michel Sapin, on the other hand, announced his country’s budget deficit would only be reduced to 4.3% of GDP in 2015, as France has received one extension after another on the EU’s deficit target of 3%. Growth for this year is now projected at 0.5%, if France is lucky, and just 1.0% next year.

And Italian Prime Minister Renzi, he of the other sick major poster child for Europe, said growth there would be only “around zero” this year, which also would actually be good seeing as the first two quarters were negative. “I am not optimistic,” Renzi said. [Renzi was accused by some this week of only looking to pick “good-looking” cabinet members.]

Separately, the ECB will not be releasing the results of its banks’ stress tests until end of October, compared to an earlier stated date of Oct. 17.

Recall, the ECB is looking at 130 of the eurozone’s largest banks as it prepares to take over as banking supervisor on Nov. 4. Italy’s finance minister said not to worry about the 15 Italian banks being reviewed, for what it’s worth.

“In the second quarter of this year, real domestic demand in the eurozone was 5 percent lower than in the first quarter of 2008. The eurozone’s unemployment rate has risen by just under 5 percentage points since 2008. In the year to July 2014, consumer price inflation in the eurozone was 0.4 percent. From these telling facts one can conclude three simple things: the eurozone is in a depression; lack of demand has played a crucial role; and the European Central Bank has failed to deliver on its own price-stability target. This is not just sad. It is dangerous. It is folly to assume continued stability if economic performance does not improve....

“This is not just a matter of economics. The capacity of the peoples of member states to tolerate high unemployment and deep slumps has been impressive. But it cannot be unlimited. If that is what the powers that be continue to advocate, the result will probably be a populist reaction. This, sadly, is what we are seeing in Scotland.  It is what we are soon likely to see elsewhere. Who is sure Marine Le Pen, leader of the far right National Front party, will not be the next president of France? Who would follow Matteo Renzi, Italy’s prime minister, if he failed? Yes, these member states need to act. But they surely need support. Mr. Draghi has shown the way. The eurozone must follow.”

Gee, where have you heard some of what Mr. Wolf spelled out before? Me thinks right here, in this very space, ad nauseam some of you might say. But boy, you can keep your head in the sand for only so long.

London house prices rose at the slowest pace in more than three years in August, according to one survey, which is good.

Bank of England Gov. Mark Carney said the BoE is likely to raise its benchmark interest rate early next year as inflation and jobs targets are met. Now that’s clarity, boys and girls!

In Germany, July exports rose a solid 4.7% from June.

Turning to Asia and China, August exports rose a better than expected 9.4%, while on the bank lending and credit fronts there were mixed signals. One indicator was good, another was poor. It’s felt the central bank instructed local ones to ‘step it up’ to steady credit growth.

As for inflation, consumer prices in August rose just 2% from a year earlier, according to the statistics bureau, while producer prices fell 1.2%, both adding to signs of weakness in domestic demand. The PPI, or factory-gate price index, dropped for a 30th straight month as some industries still face overcapacity. Both of these figures argue for more stimulus.

Chinese Premier Li Keqiang reiterated the government will continue to target areas of the economy that most need stimulus, but won’t just blindly print money.

But on a different issue, Beijing’s three antitrust regulators held a joint press briefing and rebuffed claims they were unfairly targeting foreign business such as Microsoft and Qualcomm.

Here’s the issue spelled out simply by Jin Jianmin, a senior researcher at Fujitsu Research Institute in Tokyo, who previously worked for China’s government.

“They have turned a blind eye to many practices by foreign companies before. It’s totally OK to address these problems according to law now. What you can’t do is to ban the wrongdoings by foreign companies and keep silent on domestic companies.” [Bloomberg]

In Japan, second-quarter GDP was revised downward to an annualized decline of 7.1% from 6.8%. Not encouraging for the Abe government.

Street Bytes

--The major equity averages fell for the first time in six weeks, with the Dow Jones off 0.9% to 16987, while the S&P 500 closed back below 2000 at 1985, off 1.1%, and Nasdaq lost 0.3%. 

This coming week it’s all about the Fed and the Alibaba initial public offering (as well as the Scottish vote). Regarding the latter, the price range of $60-$66 values founder Jack Ma’s stake at between $12.4 and $13.6 billion. I just hope shareholders understand they have zero...zero...say in how the company is run. Simply put, it’s a dictatorship.

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.56% 10-yr. 2.61% 30-yr. 3.34%

Yup, quite a change in two weeks, with Treasuries now having declined seven days in a row on the Fed speculation. Due to renewed uncertainty in Europe, yields there are rising quite sharply too. Spain’s 10-year rose 30 basis points from 2.04 (granted an all-time low) to 2.34% in just one week over the Catalonia fears.

The U.S. dollar rose for a ninth consecutive week, its longest rally in 17 years, on expectations the Fed will move long before the likes of the European Central Bank and the Bank of Japan.

--Dan Fuss of Loomis Sayles is one of the true veterans in the investment world, worthy of great respect, and in an interview in Barron’s, Fuss said the following.

“My greatest concern is the increase in political risk in international markets. This year’s been the difference between night and day. You have to examine your holdings and determine what really makes sense in this environment.”

Fuss is most concerned over the Ukrainian-Russian conflict, as well as Iraq/Syria and China’s troubling aggressiveness.

--The World Health Organization’s latest death toll for the Ebola outbreak is 2,400, with half of them dying in the last three weeks. Liberia is seeing the most new cases, while in Nigeria, eight out of 21 cases have died.

But in the Democratic Republic of Congo, the number doubled to 62, with 35 deaths. This is a different strain from the West Africa one, but it’s where Ebola was first discovered.

A new model by Oxford University, published in the journal eLife, looked at the reservoir of animals that spread Ebola, fruit bats, and concludes 15 more countries are at risk.

And as I noted from week one of the crisis, the economic consequences could be severe. The IMF said Thursday that economic growth in Liberia and Sierra Leone could decline by as much as 3.5% because of disruptions to key industries such as mining and agriculture. [I’m not an economist, but it will end up being far worse.]

Finally, Michael T. Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota, wrote in a New York Times op-ed at week’s end:

“The Ebola epidemic in West Africa has the potential to alter history as much as any plague has ever done....

“What is not getting said publicly, despite briefings and discussions in the inner circles of the world’s public health agencies, is that we are in totally uncharted waters and that Mother Nature is the only force in charge of the crisis at this time.

“There are two possible future chapters to this story that should keep us up at night.

“The first possibility is that the Ebola virus spreads from West Africa to megacities in other regions of the developing world.... It is much easier to control Ebola infections in isolated villages. But there has been a 300% increase in Africa’s population over the last four decades, much of it in large city slums. What happens when an infected person yet to become ill travels by plane to Lagos, Nairobi, Kinshasa or Mogadishu – or even Karachi, Jakarta, Mexico City or Dhaka?

“The second possibility is one that virologists are loath to discuss openly but are definitely considering in private: that an Ebola virus could mutate to become transmissible through the air. You can now get Ebola only through direct contact with bodily fluids. But viruses like Ebola are notoriously sloppy in replicating, meaning the virus entering one person may be genetically different from the virus entering the next. The current Ebola virus’s hyper-evolution is unprecedented; there has been more human-to-human transmission in the past four months than most likely occurred in the last 500 to 1,000 years. Each new infection represents trillions of throws of the genetic dice.”

Mr. Osterholm says the United Nations must take over the position of “command and control.”   The Group of 7 nations also must “ensure supply chains for medical and infection-control products, as well as food and water for quarantined areas.”

“If we wait for vaccines and new drugs to arrive to end the Ebola epidemic, instead of taking major action now, we risk the disease’s reaching from West Africa to our own backyards.”

I’m giving you all a homework assignment. If you didn’t watch it this week, go to PBS.org and catch the “Frontline” segment on Ebola. It’s superb...and incredibly scary. [While you’re at it, also watch the “Frontline” piece on Nigeria and the battle against Boko Haram, though it’s even more depressing.]

--Apple unveiled the iPhone 6 this week with two different, larger screens (4.7 and 5.5 inches) which is designed to prevent users from migrating to Android.

The company also announced a new service, Apple Pay, which CEO Tim Cook said would “replace the wallet.” .

But then Apple unveiled a smartwatch – the Apple Watch, which will be controlled by a “digital crown” that allows content on its screen to be magnified or scrolled through. Among the features it can act as a heart rate monitor. The thing is you need an iPhone to access the apps on Apple Watch, at least for now, plus the watch isn’t coming out until “early 2015.”

So Apple is entering the wearable tech sector, but it’s far from the first as Samsung and Sony are among those already in the field, with sales growing rapidly. They are not, however, a threat to smartphones. IDC, for example, estimates that 1.2 billion smartphones will ship this year, vs. just 19 million smartwatches. [New York Times] The Apple Watch won’t come cheap, starting at $349.

The new iPhone 6 will be available for sale on September 19* (though Apple has begun taking pre-orders). The two price points with a contract are $200 and $300.

*Uh oh...Apple just announced some orders may not be filled for three to four weeks because demand is outstripping supply. Looks like I’m sticking with my landline another year.

Meanwhile, U2’s new album is being offered as a free download to the almost half billion iTune users around the world. The album “Songs of Innocence” doesn’t come out until October, but will be available through Apple until then. Apple is paying the band and Universal an unspecified fee as a blanket royalty, with Apple committing to an extensive marketing campaign. It’s the band’s first new release since 2009.

--Court documents emerged this week revealing the federal government (read National Security Agency) was pressuring Yahoo to give up Internet communications of its customers in 2008 or face fines of $250,000 a day if it didn’t comply with a secret court order. “Under the Foreign Intelligence Surveillance Act, companies that receive data requests are prohibited by law from talking about the substance of the interactions or even acknowledging they occurred.” [New York Times]

Disclosure of this case is related to the revelations provided by Edward Snowden. Yahoo’s general counsel Ron Bell said publication of the court papers was “an important win for transparency,” adding the new material underscores “how we had to fight every step of the way to challenge the U.S. government’s surveillance efforts.” [BBC News]

--And now...health beat. There were a number of reports this week on healthcare costs.

From the Wall Street Journal: “The cost of employer health coverage continued its muted growth this year with a 3% increase that pushed the average annual premium for a family plan to $16,834, according to a major survey [Ed. Kaiser Family Foundation and the Health Research & Educational Trust]....

“The share of the family-plan premium borne by employees was $4,823, or 29% of the total, the same percentage as last year.

“The total annual cost of employer coverage for an individual was $6,025 in the 2014 survey, up 2%.” [Anna Wilde Mathews]

But since 1999, “workers’ share of health premiums has shot up 212%, nearly four times as fast as wage growth nationwide, the (Kaiser) survey found.” [Chad Terhune / Los Angeles Times]

ObamaCare premiums in Los Angeles will rise less than 1% next year for the most widely sold policy, the Kaiser study also showed. “But Nashville residents will pay nearly 9% more for the second-lowest-cost silver plan next year, while rates will drop nearly 16% for similar coverage in Denver, according to the report.” [Chad Terhune] The next open enrollment starts Nov. 15.

I haven’t talked about my personal health insurance situation because, frankly, I’ve had nothing to worry about...nor report on. My premium hasn’t budged in two years and I couldn’t be happier.

But I was just notified I need to find someone else by Dec. 15 because my policy isn’t compliant, a classic situation so many of you have faced.  Yes, I’m torqued off. But I’ll deal with it in a month or two, while rushing to get a final physical under the existing plan.

Meanwhile, despite some of the seemingly sanguine news on the premium front, according to the latest WSJ/NBC News poll only 36% still think ObamaCare is a good idea, up a bit from the 31% who supported it last September, while 46% still feel it’s a bad idea (down slightly from the 50% peak in December 2013). A Washington Post-ABC News survey has only 38% approving of ObamaCare, zero improvement since the Affordable Care Act took hold.

--McDonald’s sales slump continues with global revenues down 3.7% in August, a whopping decline as these things go, with sales in the Asia/Pacific, Middle East and Africa region down 14.5%, owing largely to ongoing issues of customer trust in China, where McDonald’s has had problems with its meat supplier. In the U.S., sales were off 2.8%.

McDonald’s also continues to have major problems in Russia with the country’s food safety watchdog, McDonald’s saying it will temporarily close 22 restaurants for ‘modernization,’ while scrapping two salads from its menu due to a ban on Western food imports.

--The U.S. Energy Information Administration’s latest International Energy Outlook report projects world consumption will grow from 87 million barrels per day in 2010 to 119 million barrels in 2040, largely driven by demand in the developing world. Specifically, 72% of the increase will come from developing Asia, including India and China.

The EIA says that at the same time demand in the U.S. and Europe has peaked due to energy efficiency efforts and fuel switching.

More specifically in the here and now, there is clearly a global oil glut, with prices at the pump tumbling the past few months. According to AAA, the average price for regular gasoline, $3.42, is the lowest level at this time of year in four years. Many experts say $3.00 is in the cards, though of course the geopolitical situation could stand in the way.

Backing up the short-term prognosis, a separate report by the International Energy Agency notes the demand for crude oil has slowed at a “remarkable” pace during the second quarter owing to weak economic growth in Europe and China. So the IEA revised its demand forecasts for 2014 and 2015 downward to 92.6m b/d and 93.8m b/d, respectively.

The author of the report, Antoine Halff, said, “Oil is a leading indicator, so maybe the global economic recovery is weaker than we think. At the same time you can see more structural changes in consumer behavior and a shift towards more efficient technologies trickling through the numbers.” [Anjli Raval / Financial Times]

--Venezuelan President Nicolas Maduro said his country will meet its “international obligations in their entirety...down to the last dollar,” amid talks of an imminent Argentina-style default. Venezuela is trying to reassure investors with $7 billion in debt needing to be refinanced this year. I’m amazed Maduro hasn’t been removed in a coup.

Venezuela has huge problems despite $85 billion in annual oil exports, and this week short-term bonds for the state-owned oil company, PDVSA, yielded over 25%. [Financial Times]

The country’s annual inflation rate has also risen to 63.4%, according to government figures released this week.

--The unemployment rate in Australia fell from a 12-year high of 6.4% to 6.1% in August as employers added a record number of jobs. But, the surge was the result of a big pickup in part-time employment, according to the statistics bureau. The housing sector has picked up after a two-year downturn, even as the mining sector continues to suffer.

--I hope you don’t have a flight planned for next week on Air France. The pilots are looking to stage a one-week strike. Not all would walk out but the airline is expecting at least 50% of its flights will be canceled. Air France should know by end of Saturday as to the severity of the job action because pilots have to give 48 hours’ notice whether they plan to strike or not.  [Inti Landauro / Wall Street Journal]

“In recent months, we have heard time and again from leading experts that the cyber threat is serious – and that the government is not doing enough. One lesson of the 9/11 story is that, as a nation, we didn’t awaken to the gravity of the terrorist threat until it was too late. We must not repeat that mistake in the cyber realm.”

--The New York Post is reporting Donald Trump may be interested in buying the bankrupt parent of the Trump Plaza and Trump Taj Mahal.

Trump Entertainment filed for Chapter 11 on Tuesday and said it would close Trump Plaza next week, which isn’t news, but now it’s threatening to shut down the Taj Mahal by Nov. 13 as well – which would be the fifth casino in Atlantic City to close in 2014.

Trump owns less than 10% of Trump Entertainment and hasn’t been involved in the day-to-day operations in years, but he first got involved in the Taj Mahal back in 1988 and was responsible for the project coming to fruition after it had financing issues.

As I’ve noted in this space in previous months, Trump has been in the news over his desire to strip his name from the Trump Entertainment properties, arguing the way they are being run is tarnishing his brand. So why not take it over? Trump would do so if he really felt A.C. had hit bottom.

--The Park City Mountain Resort resolved its control and ownership issues and is being acquired by Vail Resorts for $182.5 million. Vail had been trying to evict PCMR for failing to renew a lease. It was a messy situation, but with a good resolution.

Eventually, Vail hopes to create the largest resort in North America.

--Microsoft is in advanced talks to acquire game maker Minecraft for more than $2 billion. Mojang, the privately held Swedish company that makes Minecraft, told the Wall Street Journal its revenue was about $360 million last year.

--Hertz agreed to demands from Carl Icahn to appoint three nominees to its board, just three days after the company’s CEO resigned. Icahn also gets to appoint two of the five members of the committee that will choose a new chief executive. He has an 8.5% stake (at last official word) in the company, seeing Hertz as being undervalued...and undermanaged.

--RadioShack seems destined for bankruptcy as the company reported a quarterly loss on Thursday of $137 million, saying it was “actively exploring” options to overhaul its balance sheet, including a debt restructuring. The company has net debt of $478 million and cash and cash equivalents of $183 million, though much of the debt doesn’t mature until 2018 and 2019. 

--General Electric sold its appliance business to Sweden’s Electrolux for $3.3 billion, as CEO Jeff Immelt continues to move away from consumers and focus on bigger-ticket energy and aviation businesses. Appliances accounted for just $5.7 billion of GE’s $146 billion in revenue last year.

Electrolux will continue selling under the GE brand name, though the fate of 12,000 workers (about half of whom are in Louisville) is unknown at this point.

--Former SAC Capital Advisors LP portfolio manager Mathew Martoma was sentenced to nine years in prison for insider-trading, part of the investigation into billionaire Steven A. Cohen. Martoma could have received far less but he didn’t cooperate in the probe. He was the last of seven former analysts and fund managers from SAC to be convicted, which closes the case for Manhattan U.S. Attorney Preet Bharara, whose office charged 89 people with insider trading, beginning with the Raj Rajaratnam case, and of that number, 81 were convicted. Only one was  found not guilty at trial, Rajaratnam’s brother, and the remaining seven are still pending. [Bloomberg]

--Harvard received its largest-ever donation, $350 million to the School of Public Health, courtesy of Harvard-educated investor, Gerald Chan. In the last three years, both Cornell and Johns Hopkins also received single donations in that amount.

Chan made his money investing in biosciences companies through his vehicle, Morningside Group.

--We note the passing of S. Truett Cathy, founder of privately held Chick-fil-A. He was 93.

Cathy opened his first postwar diner in an Atlanta suburb in 1946 and 21 years later opened his first Chick-fil-A in the city. Today it has more than 1,800 outlets in 39 states, with annual sales of over $5 billion.

Cathy was known for his conservative beliefs, including the closure of many of its restaurants on Sundays, to give employees a day of rest.

He grew up in poverty and at his death was worth a reported $6 billion by Forbes.

Cathy was a phenomenally generous individual whose main focus was on supporting youth programs.

--According to a post by Tyler Durden, CNBC viewership is at a 21-year low.

--This is too funny. I shared a story I saw about New Jersey-area hotels and the business they are getting from Chinese tourists with a friend, LT, who is sales manager for a large Newark Airport hotel and she noted her place doesn’t cater to this segment (tourists who are spending their days in New York, but want a cheaper room rate so they stay across the river). One reason is no one speaks English (let alone reads it) and it’s hard to get across to them they aren’t supposed to hang their clothes on the sprinkler heads! Yes, there have been more than a few situations where they set off the fire alarms.

--Ireland’s discount airline, Ryanair, agreed to purchase 100 Boeing jets, the 737 MAX 200, with an option to buy 100 more, as Ryanair looks to expand further into Europe. Total capacity on the plane will total 197, though I wouldn’t rule out CEO Michael O’Leary looking to cram about 25 more passengers in the overhead luggage bins. Remember, when opening them, the bodies may have shifted during the flight.

--General Mills Inc. is acquiring natural foods maker Annie’s Inc. for $820 million, a nice 37% premium to Annie’s prior closing price. I’m a fan of Annie’s Mexican offerings. Pair them with a cold Dos Equis, my friends.

Foreign Affairs

Iraq: Parliament approved a new government with Sunni and Kurdish deputy prime ministers, but as noted above, the interior and defense minister positions remain open, though new Prime Minister Abadi vowed to fill them within a week. 

This is a classic case of ‘wait 24 hours.’ There is little cause for optimism, but we’ll see how quickly the government acts to both confront ISIS and bring Sunnis, Shia and Kurds together politically.

Abadi did say the government would provide weapons to the Peshmerga, but when it comes to the Sunnis, their leadership is already vowing it will offer Abadi’s government little support. Understand thousands of Sunnis are being held in prison on terror charges and the Sunnis are demanding they be released.

A local Sunni leader in Anbar province told the Wall Street Journal, “This is why we say that the revolution is still on and the resistance will keep holding its weapons until Sunni rights are restored.”

On the war front, U.S. airstrikes helped Iraqi forces and Sunni tribesmen maintain control of a key dam in western Iraq, Haditha, while Iraqi warplanes hit a hospital in a northern town controlled by ISIS, killing 18 civilians, including newborn babies.

Editorial / The Economist...on the Shia militants in Iraq and Syria...

“The myriad Shia fighting groups are linked either to Iran’s powerful clandestine arm, the al-Quds organization of Iran’s Revolutionary Guard; or to the Iraqi Shia cleric, Muqtada al-Sadr; or to factions of the Shia-dominated government. They expanded rapidly after America’s invasion of Iraq in 2003 and were believed to run death squads during the sectarian war in 2006-07.   Most of these fighters later put down their weapons, but the rise of IS has prompted a surge in new recruits....

“If the West wants to counter IS, it may have no choice but to cooperate, explicitly or implicitly, with such Shia fighters. Many Sunni groups that once helped America repel Sunni jihadists have gone over to IS, while the Kurds may have only a limited ability to advance beyond their heartland.

“Iraq’s Shias, Kurds, Christians and even many Sunnis initially welcomed the Shia militias because few trust the regular Iraqi army to defend Baghdad. But the very strength of the Shia militias will make it harder to woo disgruntled Sunnis, even with offers of more political power and jobs in the army. Shia militiamen balk at the idea of giving Sunnis more rights, and exert influence through shadowy connections to religious or political figures rather than through parliament. All this bodes ill for Haidar al-Abadi, Iraq’s new prime minister.”

The U.S. State Department also had to concede this week it was holding talks “on the margins” with Iran regarding ISIS, specifically in Geneva at a meeting to discuss negotiations over Iran’s nuclear program.

Iran: No surprise that Israeli officials say the fight against ISIS is a distraction from the priority of preventing Iran from obtaining a nuclear weapon. Yuval Steinitz, Israel’s strategic affairs minister, said in Washington this week, “ISIL is a five-year problem. A nuclear Iran is a 50-year problem, with far greater impact.” [David Sanger / New York Times]

Mr. Sanger, in his column, also had the following observation:

“(In his speech on Wednesday), Mr. Obama said nothing about the opportunity cost of his strategy: How would he ensure that 60 percent of America’s military might is in the Pacific – the goal the Pentagon has laid out – while ramping up the fight in Iraq and Syria? How would he square that with the commitment he made just a week ago to bolster NATO in Eastern Europe, part of another long-term effort, to contain Vladimir V. Putin’s Russia? Or his desire to focus the world on longer-term threats like global warming and cyberattacks?....

“(The Iranians) are already testing whether America’s newest imperative will give it maneuvering room in the negotiations over its nuclear program. With a reported new energy and trade deal, Iran is trying to split Russia away from the coalition of six powers that are negotiating with Tehran.

“The Iranians have missed deadlines to turn over material about suspected military dimensions of their program to the International Atomic Energy Agency. And Iran’s leaders have made clear that they do not plan to give ground on the main issue that is supposed to be resolved by a Nov. 24 deadline: the fate of Iran’s ability to enrich uranium....

“(The) dance required in confronting Iran’s nuclear ambitions and taking the same side in a regional battle is complex, just part of a foreign policy agenda for Mr. Obama’s last 28 months in office that looks little like the one he had imagined.”

Russian President Putin and Iranian President Rohani were to meet on Friday as part of a summit in Tajikistan to discuss trade and Iran’s nuke program. This could end up being a critical get together.

[Supreme Leader Ayatollah Khamenei had prostate surgery and it was reported to be successful. He is 75.]

Lebanon: The government’s security agency said ISIS has established 40 sleeper cells in the country, “with each believed to be comprised of three or four people of Lebanese, Syrian, Palestinian, Jordanian or Iraqi nationality who have been highly trained with guns, explosive belts, land mines and other weapons, a security source said.” [Antoine Ghattas Saab / Daily Star]

If this is true, it is unbelievably dangerous for the region overall.

At least 22 Lebanese soldiers and policemen remain in captivity after being taken hostage by ISIS and the Nusra Front. Two soldiers have been beheaded by ISIS. Nusra released seven soldiers.

Apparently, the Lebanese security forces have been informed by an eastern European country that two simultaneous attacks are planned in Beirut, both targets facing the eastern European country’s embassy.

Meanwhile, in the Bekaa Valley, near Baalbek, Hizbullah fighters have been battling rebels and jihadist groups along the Syrian-Lebanese border. Scores have been killed.

Israel: Palestinian Authority President Mahmoud Abbas wants the U.N. to replace the U.S. as leading peace broker between Israel and the Palestinians. Senior Fatah official Nabil Sha’ath told Bloomberg that if Israel does not agree to a West Bank pullout in the next round of talks, the Palestinians would challenge the Jewish state politically, “all over the universe.”

But at the same time, Abbas has threatened to dissolve his four-month-old unity government with Hamas following clashes over salaries and plans to rebuild in Gaza. It doesn’t help Abbas’ mood when he knows Hamas had plans to take him and Fatah out, as passed on to Abbas by Israeli intelligence recently.

Meanwhile, in a report broadcast by Israel’s Channel 2, Col. Dan Goldfus said Israelis needed to know that a war with Hizbullah would be “a whole different story” than the recent one with Hamas. “We will need to move quickly and flexibly.”

The missiles in Lebanon are equipped with precision guidance systems and can reach all of Israel, which would make it exceedingly difficult for Iron Dome.

The report also noted that residents near the border with Lebanon have heard noise under their houses, creating further concern Hizbullah is building tunnels a la Hamas. [Daily Star]

Ukraine: New European Union sanctions against Russia went into force, curbing the EU’s business with oil and defense firms, while putting up financing roadblocks for five big state banks. If the current ceasefire holds, and in recent days it largely has, the sanctions could be eased or lifted.

The Obama administration then announced it is joining the EU in imposing tougher measures, targeting the same sectors.

Russia’s response is unknown, though the auto sector is one that could be nailed in retaliation. Currently, Russia has a wide-ranging embargo on food imports from the continent. The ban on items such as fruit, vegetables and dairy products extends to the U.S., Canada, Australia and Norway.

Prime Minister Dmitry Medvedev warned Moscow would respond “asymmetrically” to further sanctions.

Separately, Ukraine is facing a huge winter gas shortfall, according to the country’s Deputy Prime Minister Groisman. Russia halted gas imports in mid-June in a dispute with Kiev over pricing. Ukraine is already planning on reducing heating temperatures for residential users and reducing supplies to industry, or replacing gas with other fuels.

Russia has also been reducing gas supplies to Poland and Slovakia in recent days, though this could be as much an attempt to prevent the re-exporting of gas to Ukraine as much as sending a warning to Poland and Slovakia.

Gazprom denies it is holding back gas, saying it is honoring existing contracts. Some eastern European countries, such as Hungary, aren’t keen to reverse flows to aid Ukraine because they want to fill their own storage facilities first in preparation for a standoff with Russia.

Polish President Komorowski compared Russia’s incursion into Ukraine to the 1930s.

“We are witnessing the rebirth of nationalist ideology which violates human rights and international law under the cover of humanitarian slogans about protecting minorities,” Komorowski said in a speech at the German parliament.

“We recognize this all too well from the 1930s,” he said. “The times of the peace dividend following the end of the Cold War are over.” [Jerusalem Post]

“Moscow will seek to turn (Ukraine’s) eastern provinces into autonomous entities with a veto over Ukraine’s foreign policies. It will foster constant tension to ensure that Ukraine’s political system remains weak and unstable and its economy in ruins.”

“When else will Mr. Putin have an American adversary who thinks that foreign policy is a global popularity contest, and that it’s OK for Russia to gain ground, territorially speaking, so long as the U.S. retains ground, morally speaking? Could anything be better?....

“(Putin) will give serious thought to a Baltic incursion, if only to showcase the hollowness of NATO’s military guarantees. Friday’s kidnapping (Sept. 5) by Russian forces of an Estonian counterintelligence officer...just as NATO was wrapping up its summit in Wales and in the same week that Mr. Obama visited Tallinn, was a carefully premeditated expression of contempt – and intent. With Mr. Putin, humiliating his opponents tends to be the appetizer; the main course is their destruction. Just ask former oligarch Mikhail Khodorkovsy, or Georgian President Mikheil Saakashvili, or now, Ukrainian President Petro Poroshenko.”

Finally, Dutch experts on Tuesday released their initial findings on Malaysia Airlines Flight MH17, saying the plane “broke up in the air probably as the result of structural damage caused by a large number of high-energy objects that penetrated the aircraft from outside.”

The report did not apportion blame, but Russian officials blamed Ukraine, with Defense Minister Sergei Shoigu saying, “The crash happened in the airspace of Ukraine which bears full, total responsibility for what has happened.” [AFP]

So far 193 victims out of 298 have been identified, but I haven’t seen an estimate of how many bodies remain in the now inaccessible fields.

Russia: President Putin vowed to continue Russia’s huge military buildup. Putin told senior officials on Wednesday, “Military space exploration continues, the issue of the use of non-nuclear strategic weapons is being studied, and so on and so on. A lot of threats are emerging. Recently, as you know, there was a decision made to expand NATO forces in Eastern Europe....

“The crisis in Ukraine, which was provoked and created by some of our Western partners, is now being used to reanimate that military bloc,” said Vlad the Impaler. [David M. Herszenhorn / New York Times]

Along the lines of the above, Russia announced on Monday it was restoring its once formidable Soviet military presence in the Arctic. Look at a global map and examine the Arctic territories near Alaska, for example, places like Wrangel Island and Cape Schmidt in the Chukchi Sea.

Putin seeks to control the Arctic’s vast energy and minerals potential, for starters, and Russia has embarked on a plan to construct new bases in the region. Cape Schmidt was used during the Cold War as a base for long-range strategic bombers, the closest geographic point to the United States.

Gazprom and Rosneft, which have a monopoly on Arctic oil and gas exploration, have worked since 2011 to begin production in the region.

Separately, Russia is looking to revive the “western route,” a gas pipeline spanning the westernmost chunk of the Russian-Chinese border, when it builds a pipeline to China. Neither Russia nor China wants the pipeline going through Mongolia or Kazakhstan, which would be cheaper to build, but could become politically risky at some point.

But such a pipeline directly into China from Russia would have it going through a UNESCO World Heritage site, the Golden Mountains of Altai, a major nature preserve where 4,000 to 6,500 snow leopards remain in the wild.

Putin, of course, is said to be a nature lover, but not in this instance, it would seem. [Moscow Times]

By the way, the above is another reason to look at a world map. I didn’t realize that the area where Russia and China want the pipeline going through is a very narrow piece of land, about 50km, between Mongolia and Kazakhstan.  Totally forgot this is how the geography in the area lays out.

China: Related to earlier comments on China’s increasing pressure on foreign businesses operating there, Premier Li Keqiang sought to allay fears Beijing didn’t want foreign investment at a World Economic Forum in Tianjin this week. He also sought to convince global business leaders China’s economy was resilient.

But as the South China Morning Post reported, “Many participants left the conference room halfway through the opening ceremony, something rarely seen when a top government leader representing the world’s second-largest economy speaks at a high-profile forum.”

Wow, that’s kind of bizarre...and would have been uncomfortable. Many also feel the Chinese government is fixated on the unemployment rate, said to be 5%, rather than addressing the risks in the property and shadow banking sectors.

But regarding the attacks on foreign businesses, the EU Chamber of Commerce in China “has issued several scathing denouncements of investigations and ‘intimidation tactics’ it says its members have been subjected to. The U.S. Chamber of Commerce has described the investigations against American companies as protectionism designed to benefit Chinese companies rather than protecting the rights of consumers and ensuring fair competition.” [Jamil Anderlini / Financial Times]

National Security Advisor Susan Rice was in China for three days, ahead of President Obama’s visit in November for the Asia Pacific Economic Cooperation summit. By all accounts, her visit was far from good. A senior Chinese military officer told her the United States should halt its “close-in” aerial and naval surveillance of China.

Meanwhile, a new poll revealed that 53.4% of the Chinese believe their country could go to war with Japan in the future, which is a little disturbing. The percentage of Chinese who have an unfavorable impression of Japan is 86.8%, an improvement on 92.8% last year.

93% of Japanese respondents to the annual Genron and China Daily poll, said their impression of China was “unfavorable,” worsening from 90.1% last year.

On the pollution front, recall a report released by the Ministry of Environmental Protection this spring said 19.4% of China’s arable land is contaminated, but now a new report said all 74 cities surveyed by the government exceeded World Health Organization air standards. A 2013 study by the Ministry of Land and Resources found nearly 60% of China had “very poor” or “relatively poor” groundwater quality. That about covers it. The place is a hell-hole.

France: 62% of French voters would like to see Socialist President Francois Hollande resign before the end of his term in 2017, according to an IFOP/Le Figaro magazine survey. A quarter of Socialist voters said they wanted to see him go early. Imagine this...his approval rating in this poll is 13%! If President Obama ever hit that level, or any American president these days, that would spell revolution. In France it may yet do so.

Random Musings

--President Obama received a record low 40% job approval in the latest Wall Street Journal-NBC News poll. In the Washington Post-ABC News survey, Obama’s job approval was at 42%.

Congress registered a pathetic 14% overall job approval in the WSJ-NBC poll, 15% in the WP-ABC survey.

--In the Washington Post-ABC News poll, just 31% approve of President Obama’s handling of the immigration issue, down 18 points since the beginning of 2013. Last Saturday, the White House announced he would delay taking any executive action until after the November elections, amid protests from some Senate Democrats worried a move by the president prior to the vote would hurt their chances. [Specifically, candidates in Alaska, Arkansas, Louisiana, New Hampshire and North Carolina were concerned a move prior to November could cost them. Even Al Franken in Minnesota supposedly asked Obama to delay.]

It is expected that the administration eventually will move to prevent up to five million living here illegally from being deported and the WP-ABC poll found that 46% say undocumented immigrants should be given the right to live and work here legally, with 50% opposed.

The New York Times’ Michael D. Shear deserves credit for first breaking the president’s delay in taking executive action. It was back on June 30 that Obama angrily denounced Republican obstruction and vowed to act alone. But in announcing the delay, a White House official said:

“Because of the Republicans’ extreme politicization of this issue, the president believes it would be harmful to the policy itself and to the long-term prospects for comprehensive immigration reform to announce administrative action before the elections. Because he wants to do this in a way that’s sustainable, the president will take action on immigration before the end of the year.” [Michael Shear]

Republican Senator Lamar Alexander (Tenn.) said, “The founders of our country did not want a king, and the American people do not want a president who acts like one,” calling Obama’s decision a “shameful presidential trick.”

Hispanic activists are none too pleased either, seeing it as another broken promise.   [Obama received 73% of their votes in 2012.]

For his part, Obama told NBC’s Chuck Todd, “The truth of the matter is that the politics did shift midsummer because of that problem,” referring to the surge of unaccompanied children across the border.

“(I) want to make sure that the public understands why we’re doing this, why it’s the right thing for the American people, why it’s the right thing for the American economy.”

Senate Minority Leader Mitch McConnell (Ky.) said Obama is playing “Washington politics at its worst.”

“So President Obama says he still plans to unilaterally rewrite immigration law – but not until after the election so he can spare Democrats in Congress from the wrath of voters for doing so. And he wonders why Americans are cynical about politics?....

“It’s hard to remember now, but this is the same man who ran for office in 2008 promising a new era of political comity. If he follows through on his immigration ploy, he will leave behind a country even more polarized and cynical.”

--The latest Wall Street Journal-NBC News poll found 43% of registered voters view Hillary Clinton positively, compared with the 41% who harbor negative views, a big drop from February 2009 when 59% saw Clinton in a favorable light and just 22% held negative views.

The WSJ-NBC survey found that in the 12 battleground states with the most competitive Senate races (Republicans needing to net six to regain control), 58% disapprove of President Obama’s performance, not a good sign for Democrats. Nine of the 12 are states Obama lost in 2012.

--A CNN/ORC poll of Iowa Republicans has Mike Huckabee on top with 21%, followed by Paul Ryan at 12% and Rand Paul with 7%. Ergo, we are a long ways, my fellow elephants, from figuring out who our candidate will be in 2016.

“The best for which Mr. Obama can wish for (following Republican gains in the midterms) is that he can use the next two years to prepare the ground for a Democrat to succeed him in 2016. Perhaps Hillary Clinton would have better luck pushing through Mr. Obama’s now entirely hypothetical agenda. Certainly, she might be entitled to hope for better than the reception Mr. Obama has had.

“On a count of bills passed, the outgoing 113th Congress has been the least productive since the 19th century – one political scientist had to go as far back as the ninth Congress (between 1805 and 1807) during the presidency of Thomas Jefferson. Such are the results of partisan gridlock. Mr. Obama had hoped for so much more. Now it is the least bad option before him.”

--In a New York state primary, Democratic Gov. Andrew Cuomo defeated an insurgent challenger, Zephyr Teachout, just 62-35. This is an embarrassment for Cuomo that he couldn’t win more handily, with his choice for lieutenant governor, Kathy Hochul, only prevailing 60-40 over Teachout’s running mate, Tim Wu, who was endorsed by the New York Times.

Lucky for Cuomo, his Republican challenger in November, Rob Astorino, remains about 30 points behind.

--Why New Jersey Gov. Chris Christie insists on thinking he is a leading presidential candidate for 2016, I’ll never know. As I’ve written for years now, my state just isn’t doing that well under his stewardship. This week Standard & Poor’s became the latest to downgrade the state’s credit rating. As reported by the Star-Ledger’s Matt Friedman, S&P noted that “shorting the state’s public employee pension obligation, making rosy revenue forecasts that didn’t come true and relying on one-shot budget measures have put ‘additional pressure on future budgets.’”

It’s the eighth time a credit rating agency has downgraded New Jersey since Christie took office in January 2010, and five days after Fitch knocked the state’s rating down a peg.

Of course Christie in a presidential primary debate will also be faced with the question, “Governor, just what did happen to Atlantic City?” “Ah, ah, ah....”

Before the $2.4 billion Revel casino’s grand opening just two years ago, Christie said, “The completion of Revel and its opening is a turning point for Atlantic City and a clear sign that people once again have faith in the city’s ability to come back.”

Not quite. As noted above, four casinos will have closed by month’s end, with another one or two a possibility.

Back to Revel, though, Christie’s ‘out’ is that while he authorized $261 million in tax incentives to complete the project, the incentives could only be claimed if the project was profitable so, for example, in a debate, Christie can claim no taxpayer dollars were lost on Revel. [Paul Kane / Washington Post]

--Democratic Gov. Dannel Malloy of Connecticut trails his Republican challenger Tom Foley, 46-40, in the latest Quinnipiac University poll. This is a rematch of a close 2010 race.

--The Dalai Lama told a German newspaper this week that he should be the last in his line of Tibetan spiritual leaders.

“We had a Dalai Lama for almost five centuries. The 14th Dalai Lama now is very popular. Let us then finish with a popular Dalai Lama,” he told the Welt am Sonntag newspaper in an interview. So his spiritual role could expire with his death.

“If a weak Dalai Lama comes along, then it will just disgrace the Dalai Lama,” he said.

Whatever. I make no apologies for my long-held belief he is about the most overrated world figure of our time. He has done nothing but relax in exile...since 1959! Plus what good has he done his people?! He’s a man of peace who, unlike other world religious leaders (next week I’ll write about what Shimon Peres said about Pope Francis...time precludes it today), has had zero impact. Continuing on....

--The five-year average of West Nile virus cases in California is 74, but thus far in 2014, there have been 238 reported cases, with nine deaths. The danger is greatest later in the year, with mosquitoes having contracted the virus earlier.

So I read the above statistics in a story by Jim Carlton in the Wall Street Journal and I was confused that the drought is fueling the virus. Doesn’t make sense, right?

Well, the experts, as noted by Mr. Carlton, say “there are fewer sources of natural water for virus-carrying birds*, forcing them to mix more with mosquitoes around urban water sources.”

*The mosquitoes suck blood out of birds that are the disease’s major carriers.

Warm temperatures are also conducive to more mosquitoes. Orange County has seen a whopping 85 of the 238 cases, by the way.

And get this. “Around 80% of mosquitoes tested have the virus,” according to county officials there. Yikes. Most years it’s 20%.

“Viruses can spread from a single doorknob to 40 to 60 percent of surfaces and people in a building in just a few hours, according to a new study.”

University of Arizona researchers put a virus on a push plate in an office building of 80 people, had three entrances, and within four hours it ended up on over half the people’s hands, and it ended up on over half the surfaces that people touched in that building,” said the UA’s Charles Gerba.

“What we really learned was the hand is quicker than the sneeze in the spread of disease,” Gerba said.

And, yes, in an office the hot spot is not the bathroom...it’s the break room.

--I couldn’t care less about the Oscar Pistorius trial but I guess I have to note for the archives that he was convicted of “culpable homicide,” the equivalent of manslaughter here, but acquitted of murdering Reeva Steenkamp. Pistorius could be sentenced to as much as 15 years on Oct. 13, or could walk away a free man. The judge allowed him to remain free until then as she extended his bail. For her part, she is a joke.

--A U.N. report says the ozone hole that appears annually over Antarctica has stopped growing bigger every year, though it will take a decade before the hole starts to shrink. The study was published by researchers from the World Meteorological Organization and the U.N. Environmental Program.

“International action on the ozone layer is a major environmental success story... This should encourage us to display the same level of urgency and unity to tackle the even greater challenge of tackling climate change,” said WMO Sec.-Gen. Michel Jarraud.  

But this week it was also reported atmospheric greenhouse gases had reached a record high. [BBC News]

--President Obama wanted to play golf in the worst way over the Labor Day weekend in the New York area, where he was a guest at a wedding and doing some fundraising. But as NBC 4 in New York’s Jonathan Dienst first reported, Obama was turned down by famed courses such as Trump National, Winged Foot and Willow Ridge, among others, as the president’s advance team called around with one or two days’ notice to play that Saturday of the holiday weekend, only one of the busiest single days of the entire season.

Yeah, right, Winged Foot would willingly shut down the course so the president could play, thus screwing their members. I don’t think so. But that’s Obama for you. Just a wee bit arrogant.

--Rapid City, South Dakota saw its earliest snowfall on Thursday in more than 120 years. Mount Rushmore had over seven inches. RUN FOR YOUR LIVES!!!!

Pray for the men and women of our armed forces...and all the fallen.

Gold closed at $1231...lowest weekly close since December.
Oil $92.27...lowest since May 2013.

Returns for the week 9/8-9/12

Dow Jones -0.9% [16987]
S&P 500 -1.1% [1985]
S&P MidCap -1.3%
Russell 2000 -0.8%
Nasdaq -0.3% [4567]

Returns for the period 1/1/14-9/12/14

Dow Jones +2.5%
S&P 500 +7.4%
S&P MidCap +5.9%
Russell 2000 -0.3%
Nasdaq +9.4%

Bulls 57.6
Bears 14.1 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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